Reality Check: Forced Retirement Saving Needed?

Some 40 percent of working households lack access to, or are ineligible to participate in, an employer-sponsored defined contribution plan, according to a Government Accountability Office.

State Street Global Advisors (SSGA) is proposing a new system and a new way of looking at retirement fund regulation.

“In many ways retirement is a privilege and we need to move away from it being a privilege,” said Fredrik Axsater, global head of defined contribution with SSGA.

SSGA’s national framework would mandate auto enrollment, auto-escalation, tax incentives for small employers and the elimination of barriers to Multiple Employer Plans (MEPs).

This new system would help solve the growing retirement crisis, said Brigitte Madrian, professor of Public Policy at the Kennedy School of Government at Harvard University.

“This is a set of proposals that will make the retirement system better off and increase financial security for individuals in their old age for decades going forward,” Madrian said.

Madrian and Axsater were featured speakers along with SSGA’s Melissa Kahn at a press event in Manhattan in June where they released details.

The plan would expand retirement coverage to a large percent of the population, Axsater said.

“We made this as comprehensive as possible to include all employers because those small employers or small businesses represent a large portion of American workers,” Axsater said.

The proposals mirror many of those backed by the Obama administration, which sent a legislative proposal to Congress earlier this year.

According to SSGA, one-third of American workers are with businesses that employ 100 workers or less, with people of color disproportionally impacted.

“Some two-thirds of Hispanics are with small employers, about half of African-Americans and half of Asians as well, so I think that this proposal is an equalizer to include all corporations,” Axsater said.

Under the SSGA plan, all private-sector working Americans will have retirement coverage by 2018.

“Retirement is something that we should all enjoy but we need the right public policy in place for that to happen,” Axsater said.

Auto enrollment and auto escalation would begin at 6 percent minimum in the first year and automatically escalate up to 12 percent over three years in 2 percent increments. The program would be phased in, Madrian said.

“To make it easier for small businesses, this mandate would not apply to any business that has not been operating for three years so we really want to ramp it up for people slowly,” Madrian said.

Proposed tax credits for smaller employers would cover all administrative costs associated with offering an employer-sponsored plan for the first five plan years, said Kahn, managing director of retirement policy for defined contribution with SSGA in Washington, D.C.

“The tax credits would only apply to employers of 100 or fewer employees,” Kahn said. “We chose 100 because that tends to be what's in the tax code now.”

Currently, it's only possible to set up a MEP if all of the companies are in the same profession.
For example, the American Bar Association offers a MEP for small attorneys that aren’t part of a big law firm but want an easy way to save for retirement, Madrian said.

“We are proposing setting up MEPs for employers that have some sort of affiliation but are not necessarily doing the same thing professionally,” she added.

Congress has shown bipartisan interest in several of the proposals, including auto-enrollment, and recently held a roundtable discussion on MEPs.

Juliette Fairley is a business and finance journalist who has written four personal finance books for John Wiley & Sons and has written for major news organizations, such as The New York Times and The Wall Street Journal. She is a member of the American Society of Journalists and the New York Financial Writers Association and a graduate of Columbia University's Graduate School of Journalism. Juliette can be reached at [email protected]